Position statement

OTTAWA, February 23, 2015 — This statement summarizes the approach taken by the Competition Bureau in its review of the proposed three-partinter-conditional transaction between GlaxoSmithKline plc (GSK) and Novartis AG (Novartis) pursuant to agreements announced on April 22, 2014 (Proposed Transaction). The Proposed Transaction, only one part of which was notifiable under the Competition Act (Act), pertains to the parties’ consumer healthcare, vaccines and oncology businesses.

On February 23, the Bureau issued a No Action Letter to the parties stating that, given the implementation of a consent agreement between the United States Federal Trade Commission (U.S. FTC) and Novartis, and specifically the required sale of certain assets to Array BioPharma, the Commissioner of Competition does not at this time intend to make an application under section 92 of the Act in respect of the Proposed Transaction. Section 97 of the Act provides for a one-year period following the completion of the Proposed Transaction during which the Commissioner may challenge the transaction before the Competition Tribunal.

In conducting its review, the Bureau cooperated and worked closely with the U.S. FTC and the European Commission (EC). The Bureau’s long-standing relationship with these agencies ensured an efficient and coordinated review of the Proposed Transaction. The Bureau also conducted interviews with numerous stakeholders, including federal and provincial government agencies, retail and pharmacy customers, distributors and competitors.Footnote 1

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Background

GSK and Novartis are multinational companies that manufacture and distribute pharmaceutical and consumer healthcare products in Canada and throughout the world. On April 22, 2014, they announced a three-partinter-conditional transaction whereby:

GSK and Novartis will create a joint venture in respect of their over-the-counter and consumer healthcare products (OTC Acquisition);

Novartis will sell its global vaccine business, with the exception of its influenza vaccine business, to GSK (Vaccines Acquisition); and

The Vaccines Acquisition and the Oncology Acquisition were non-notifiable transactions pursuant to Part IX of the Act. Given the importance of pharmaceutical products to Canadians, changes in the pharmaceutical industry are of significant interest to the Bureau. Accordingly, the Bureau undertook a full review of the Proposed Transaction.

Analysis

The Bureau examined the effects of the Proposed Transaction on the parties’ products that are currently marketed, as well as those that are in research and development (pipeline products). The Bureau focused on whether the Proposed Transaction was likely to increase prices in the relevant markets or decrease another dimension of competition, such as innovation.

OTC acquisition

Both parties sell the following types of OTC products in Canada: heartburn relief products, skin moisturizers and cold sore treatments. The Bureau’s analysis focused on whether the parties’ products compete in the same product market.

In determining the degree of competition between the parties’ products, the Bureau considered a number of factors, including active ingredients, indications and clinical uses, therapeutic classes as defined by the World Health Organization’s Anatomical Therapeutic Chemical classification system, method of delivery and average retail prices. The Bureau also consulted with numerous stakeholders, including competitors and pharmacy customers.

The Bureau determined that, while the parties’ products are broadly used to treat the same or similar ailments, they are not close substitutes. For each product category, there are other products on the market, often manufactured and distributed by large multinational consumer healthcare and pharmaceutical companies that are likely closer competitors to the parties’ products and act as effective remaining competition.

Vaccines acquisition

Both parties sell the following vaccine products in Canada: Meningitis C vaccines and Meningitis Quadrivalent vaccines.

i. Meningitis C vaccines

Meningitis C vaccines are administered to infants across Canada pursuant to each provincial and territorial recommended immunization schedule. Public Works and Government Services Canada (PWGSC) is the largest buyer of these vaccines and purchases them on behalf of governments pursuant to tender processes.

Two Meningitis C vaccines are available for sale in Canada: Pfizer’s NeisVac-C and Novartis’s Menjugate. NeisVac-C, while owned by Pfizer, is distributed by GSK in Canada, thus resulting in a horizontal overlap between Novartis and GSK. Prior to concluding that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition in the supply of Meningitis C vaccines, the Bureau received commitments from GSK to ensure that GSK would facilitate an appropriate transfer of NeisVac-C to Pfizer and would do so in a manner designed to preserve the competitiveness of the Meningitis C vaccine tender process commenced by PWGSC in 2014.

ii. Meningitis quadrivalent vaccines

Meningitis Quadrivalent (also known as Meningitis ACWY) vaccines are administered to adolescents pursuant to a number of provincial and territorial recommended immunization schedules. As with Meningitis C vaccines, the largest buyer of these vaccines in Canada is PWGSC, which purchases Meningitis Quadrivalent vaccines on behalf of governments pursuant to tender processes. While the Meningitis Quadrivalent vaccine, like the Meningitis C vaccine, provides protection against serogroup C meningococcal disease, it is not a substitute for the Meningitis C vaccine primarily due to the significant price difference between the two products.

There are three suppliers of the Meningitis Quadrivalent vaccine in Canada: Sanofi Pasteur, GSK and Novartis. While the Proposed Transaction decreases the number of suppliers of the vaccine from three to two, the Bureau concluded that PWGSC’s tender rules specific to the Meningitis Quadrivalent tender process would safeguard the competitive nature of the tender process and ensure that Canadians continued to benefit from competition in the supply of this vaccine.

In Europe, the Vaccines Acquisition would result in a merger-to-monopoly for the supply of Meningitis Quadrivalent vaccines. GSK committed to the EC to sell its global Meningitis Quadrivalent vaccines business to a suitable buyer to be determined post-closing of the Vaccines Acquisition. Had the Bureau determined that the Vaccines Acquisition would likely result in a substantial lessening or prevention of competition in Canada, the Bureau would not have been prepared to rely upon the global remedy agreed to in Europe without the ability to ensure that the buyer had the intention and ability to compete effectively in Canada.

Oncology acquisition

The parties’ oncology portfolios include both currently marketed products, as well as pipeline products. In determining the degree of competition between the parties’ products, the Bureau considered a number of factors, including the products’ mechanism of action, (i.e., the specific biochemical interaction through which a drug substance produces its pharmacological effect) indication and clinical use. The Bureau also consulted with research physicians, clinical physicians, competitors and various government agencies to better understand the extent to which the parties’ products could act as substitutes for one another.

The Bureau’s review focused on the MEK/BRAF combination therapy that both parties are currently developing to treat a particular sub-group of metastatic melanoma patients. The therapy combines two products, a MEK inhibitor and a BRAF inhibitor, to produce a potentially more effective and less toxic therapy than what is currently available to this patient sub-group. The parties’ combination therapies are in late-stage research and development for the metastatic melanoma indication, employ the same mechanisms of action and are being trialed for use in the same patient population. Only one other competitor, Roche, is developing a comparable combination therapy.

Using the framework for "prevention of competition cases" endorsed by the Supreme Court of Canada in Tervita Corp. v. Canada (Commissioner of Competition),Footnote 2 the Bureau concluded that "but for" the Proposed Transaction, it is likely that Novartis would have continued clinical trials for its MEK/BRAF combination therapy and the therapy would have been available in Canada in 2017. The Proposed Transaction would likely have a substantial effect on competition through a loss of innovation. Specifically, post-transaction, evidence indicated that Novartis would likely abandon the development of its MEK/BRAF combination therapy, as this product was further away from market than GSK’s combination therapy. This would result in a loss of patient choice between competing therapies.

Remedy and conclusion

For the reasons set out above, the Bureau concluded that the OTC Acquisition and Vaccines Acquisition are not likely to result in a substantial lessening or prevention of competition in any relevant product market in Canada.

In respect of the Oncology Acquisition, the parties have entered into a consent agreement with the U.S. FTC, the terms of which require Novartis to sell its MEK inhibitor and BRAF inhibitor to a third-party pharmaceutical company, Array BioPharma. The Bureau determined that Array BioPharma has the intention and ability to compete effectively in Canada. As a result, the implementation of this consent agreement will adequately resolve the Bureau’s concerns related to the Oncology Acquisition.

The Bureau, where appropriate, will take into consideration and rely on remedies agreed upon in other jurisdictions, provided that such remedies fully address the Bureau’s concerns. The Bureau is satisfied that the implementation of the consent agreement in the U.S. will adequately resolve competition concerns in Canada.

The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.

This publication is not a legal document. The Bureau’s findings, as reflected in this Position Statement, are not findings of fact or law that have been tested before a tribunal or court. Further, the contents of this Position Statement do not indicate findings of unlawful conduct by any party.

However, in an effort to further enhance its communication and transparency with stakeholders, the Bureau may publicly communicate the results of certain investigations, inquiries and merger reviews by way of a Position Statement. In the case of a merger review, Position Statements briefly describe the Bureau's analysis of a particular proposed transaction and summarize its main findings. The Bureau also publishes Position Statements summarizing the results of certain investigations, inquiries and reviews conducted under the Competition Act. Readers should exercise caution in interpreting the Bureau’s assessment. Enforcement decisions are made on a case‑by‑case basis and the conclusions discussed in the Position Statement are specific to the present matter and are not binding on the Commissioner of Competition.

Footnotes

Footnote 1

Analytical methodologies are applied, and enforcement decisions are made, on a case-by-case basis. The methodologies and conclusions discussed in this statement are specific to the review of the transaction in question and are not binding on the Commissioner. The legal requirements of section 29 of the Competition Act, and the Bureau’s policies and practices regarding the treatment of confidential information, limit the Bureau’s ability to disclose information obtained during the course of a merger review.